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Will Flowers Foods Continue to Blossom?

Flowers Foods has been on an acquisition rampage. Is it likely to pay off?

Flowers Foods(NYSE:FLO) has seen share deprecation of 9.68% over the past month, but Foolish investors prefer to look at the long-term picture. The recent poor performance relates to the company not beating third-quarter expectations (as so many had hoped for) and reducing its fiscal-year 2013 guidance to earnings per share of $0.90-$0.93 from $0.92-$0.98.

However, this relates to margin decline in warehouse volumes (not direct-store-delivery volumes), higher-than-expected marketing expenses, and increased infrastructure expenses related to increased volumes from recent acquisitions. Fiscal-year 2013 sales are expected to be in line with the consensus of $3.8 billion, at $3.79 billion to $3.82 billion. Now let's take a look at the big picture.

StrategyFlowers Foods has a goal of positioning its baked foods wherever baked foods are consumed. This pertains to homes, restaurants, fast-food restaurants, institutions, and wherever else someone might consume a baked good. By continuously searching for these opportunities -- including via acquisitions -- its top line should continue to grow.

At the same time, Flowers Foods looks to improve its bottom line by optimizing operations. Flowers Foods is a low-cost producer that delivers fresh to customers via independent distributors that produce items for their own regions.

Flowers Foods also wants to stay in-trend. This has been the case for many years. For instance, Flowers Foods purchased Nature's Own in 1977, at a time when consumers wanted healthier baked goods. Nature's Own has no artificial flavors, colors, or preservatives, and high-fructose corn syrup has recently been removed while omega 3 and increased fiber have been added.

Another example of Flowers Foods staying in-trend was its Tasty Baking Co. acquisition in 2011. The company's Tastykake brand had been hot in the Northeastern United States. Logically, Flowers Foods acquired the brand and is now expanding its presence. If a brand is a success in one area of the country, then it's likely to be a success in other areas of the country as well.

Another little-known fact that might put investors' minds at ease is that employees are on a performance-based cash bonus program, and there are performance-based stock awards. Therefore, there are extra incentives for management.

As you might already know, Flowers Foods purchased Wonder, Nature's Pride, Merita, Home Pride, and Butternut from Hostess. This is in addition to the aforementioned acquisitions, as well as Lepage, Sara Lee/California, and Earthgrain. Based on these acquisitions, Flowers Foods is expected to have a 17.3% market share position in baked goods.

Pepperidge Farm, a Campbell's Soup(NYSE:CPB) brand, has also seen increased volumes after the Hostess liquidation last year. However, it only has a market share of 5.7% in baked goods. Approximately 28% of Campbell Soup's net sales come from bakery and snacks. On the other hand, Campbell Soup offers more category diversification, and its recent acquisitions of Plum Organics and Bolthouse Farms indicate that it's also in-trend, focusing on the health-conscious consumer.

If you're looking for even broader diversification, then you might want to consider ConAgra Foods (NYSE:CAG). With its recent Ralcorp acquisition, ConAgra Foods now has strong exposure in cookies, crackers, chocolate, snacks, cereal, mayonnaise, pasta, and peanut butter. However, broader category diversification doesn't always mean the best investment potential. Let's take a closer look at these three companies to determine which one is likely to outperform the others going forward.

Flowers Foods vs. Campbell Soup vs. ConAgra FoodsWhen you look at the top-line comparison chart below, which covers the past year, keep in mind that the Hostess liquidation has led to significant volume increases for Flowers Foods, and that ConAgra's Ralcorp acquisition has greatly affected its top line in a positive manner:

Flowers Foods is trading at a premium compared to Campbell Soup and ConAgra Foods, but it's growing the fastest on the top line, it's the best of the three at turning revenue into profit, and it offers the lowest debt-to-equity ratio. If you're a dividend investor, then you might point out that Flowers Foods lags Campbell Soup and ConAgra Foods in yield, but before you negate Flowers Foods as a potential investment for this reason, you might want to first take a look at total shareholder return (stock appreciation plus dividends) for each of these companies over the past decade:

Past results don't indicate future results, but they're a good indication of how management teams are likely to continue steering their companies.

The bottom lineAll three aforementioned companies are long-term winners. However, Flowers Foods is continuing to increase its market share, primarily through inorganic growth. Flowers Foods has made strategic in-trend acquisitions through the years and this has paid off in a big way. When you invest in Flowers Foods, you're investing in a highly strategic operation.